Case Study

Zale Corporation

Zale Corporation is a leading specialty retailer of diamonds and other jewelry products in North America. The Company competes in the retail jewelry industry by leveraging its established brand names, economies of scale and geographic and demographic diversity.

During the fiscal year ended July 31, 2010, the Company generated $1.6 billion of revenues. Zale Corporation reports operations under three business segments: Fine Jewelry, Kiosk Jewelry and All Other. During fiscal year 2010, its Fine Jewelry segment generated $1.4 billion, or approximately 85 percent of its revenues. In the Kiosk Jewelry segment, revenues represented approximately $226 million, or 14 percent.

Assignment

PJ SOLOMON was engaged to pursue a capital raising transaction that would enable the Company to pay down bank debt and maximize financial flexibility.

Challenge

A weak economic environment and merchandising issues resulted in declining sales and cash flow over a three year period.

Borrowing base under asset-based revolver was hindered by declining inventory values.
Availability under revolver approached minimum covenant threshold jeopardizing the Company’s financial flexibility.

A new capital raise was essential to fund the Company’s turnaround plan to avoid bankruptcy filing. The objective was to raise sufficient liquidity while preserving value for existing shareholders.

Process

PJ SOLOMON targeted specific potential financial and strategic parties to maximize interest in an investment in the Company. This included taking an integrated approach through which PJ SOLOMON worked with a variety of potential capital sources in order to enhance the possible options for the company in achieving its recapitalization.

The Company was successful in raising a new $150 million secured term loan with warrants or “Secured PIPE” with Golden Gate Capital, a private equity firm with significant retail turnaround experience.

The term loan proceeds paid down the revolver and enabled a four year amendment and extension of the facility.

Results

Golden Gate Capital’s term loan investment improved the Company’s liquidity position and endorsed management’s turnaround plan.

Golden Gate representatives joined the board to provide their experience and expertise with the objective of increasing equity value.

The Company’s capital structure now consists of a 4-year revolver and a 5-year secured term loan.

Equity value was preserved and Chapter 11 filing was averted.


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